1. Money and
Banking
Chapter 31
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter Objectives
• The functions of money
• Components of the money supply
• What “backs” the money supply
• The Federal Reserve and the
U.S. banking system
• The functions and responsibilities
of the Federal Reserve
31-2

3. Functions of Money
• Medium of exchange
–Used to buy/sell goods
• Unit of account
–Goods valued in dollars
• Store of value
–Hold some wealth in money form
• Money is liquid
31-3

4. Money Defined
• M1
–Currency
–Checkable deposits
• Institutions offering checkable
deposits
–Commercial banks
–Savings and loan associations
–Mutual savings banks
–Credit unions
31-4

5. Money Defined
• M2
–M1 plus near-monies
–Savings deposits including money
market deposit accounts (MMDA)
–Small time deposits
–Money market mutual funds
(MMMF)
31-5

6. Money Defined
M1 M2
56%
44%
M1
18%
Savings Deposits,
Including Money Market
Deposit Accounts
Small Time Deposits
Money Market Mutual
Funds Held By Individuals
Currency
Checkable Deposits
16%
14%
52%
$1,365
Billion
$7,499
Billion
January 2008
Totals
+
+
+
+
+
Source: Federal Reserve System
31-6

7. Money Supply
• Are credit cards money?
• What “backs” the money supply?
–Nothing!
• Why is money valuable?
–Acceptability
–Legal tender
–Relative scarcity
31-7

8. Money and Prices
• Prices affect purchasing power of
money
• Hyperinflation renders money
unacceptable
• Stabilizing money’s purchasing
power
–Intelligent management of the
money supply – monetary policy
–Appropriate fiscal policy 31-8

9. Federal Reserve System
• Historical background
• Board of Governors
• 12 Federal Reserve Banks
–Serve as the central bank
–Quasi-public banks
–Banker’s bank
31-9

10. Federal Reserve System
Commercial Banks
Thrift Institutions
(Savings and Loan Associations,
Mutual Savings Banks,
Credit Unions)
The Public
(Households and
Businesses)
12 Federal Reserve Banks
Board of Governors
Federal Open Market Committee
31-10

11. Federal Reserve System
The 12 Federal Reserve Banks
Source: Federal Reserve Bulletin
31-11

12. Federal Reserve System
• Federal Open Market Committee
–Aids Board of Governors in setting
monetary policy
–Conducts open market operations
• Commercial banks and thrifts
–7,300 commercial banks
–11,000 thrifts
31-12

13. Federal Reserve Functions
• Issue currency
• Set reserve requirements
• Lend money to banks
• Set discount rate
• Check collection
• Fiscal agent for U.S. government
• Supervise banks
• Control the money supply
31-13

14. Federal Reserve System
• Federal Reserve independence
• Recent developments
–Relative decline of banks and thrifts
–Consolidation
–Convergence of services provided
by financial institutions
–Globalization of financial markets
–Electronic payments
31-14

15. Financial Institutions
World’s 12 Largest Financial Institutions, 2007
Barclays (UK)
BNP Paribas (France
Citigroup (USA)
HSBC Group (UK)
UBS (Switzerland)
Royal Bank of Scotland (UK)
ING Group (Netherlands)
Mitsubishi UFJ (Japan)
Deutsche Bank Group (Ger)
Bank of America (US)
Allianz Worldwide (Ger)
JPMorgan Chase (USA)
0 1,300,000 1,600,000 1,900,000
Source: Organization for Economic Cooperation and Development
Assets (Billions of U.S. Dollars)
31-15

16. U.S. Financial Institutions
• Commercial banks
• Thrifts
• Insurance companies
• Mutual fund companies
• Pension funds
• Securities firms
• Investment banks
31-16

17. The Global Greenback
• U.S. currency circulating abroad
–Russia $80 billion
–Argentina $50 billion
–$450 billion total
–60% of total US currency
• U.S. profits from dollars leaving
• Black markets and illegal activities
• Dollar offers stable purchasing power
• Exchange rate risk
31-17

18. Key Terms
• medium of exchange
• unit of account
• store of value
• M1
• Federal Reserve Notes
• token money
• checkable deposits
• commercial banks
• thrift institutions
• near-monies
• M2
• savings account
• money market deposit
account (MMDA)
• time deposits
• money market mutual
fund (MMMF)
• legal tender
• Federal Reserve
System
• Board of Governors
• Federal Reserve Banks
• Federal Open Market
Committee (FOMC)
• financial services
industry
• electronic payments
31-18

19. Next Chapter Preview…
Money
Creation
31-19